Hey there, time traveller!
This article was published 27/9/2016 (243 days ago), so information in it may no longer be current.
Pensions were central issues for Canada Post and for General Motors Canada in their labour negotiations this summer. Both employers wanted to provide defined contribution pensions for the workers they hire from now on, in place of the defined benefit plans provided for the earlier generation of workers. These two labour disputes and their results show how Canada’s pension landscape is evolving.
The post office, a Crown corporation, backed away from its demand to switch to a defined contribution plan. The employer concluded a labour contract for two years instead of the usual four years. This defers for two years the showdown over pension curtailment. General Motors, however, stuck to its guns: Unifor, the autoworkers union, backed off and agreed to new pension packages for newly hired workers.
Canadians are being divided more and more sharply between those who work for the government, including teachers, whose pension benefits are guaranteed by their employers, and those who don’t, who must be successful investors in order to enjoy a good income in their retirement years.
In a defined benefit plan, the employees contribute to the plan out of their paycheques and the employer promises a stated level of benefits after retirement. If the pension fund is not large enough to cover the benefits when the time comes, the employer makes up the difference. In a defined contribution plan, the employer makes no promise about the level of benefits. The employees assume the risk of poor investment returns. The employer is spared the expense of covering a pension plan deficit. Employers who lack the power to impose taxes prefer defined contribution plans.
The automobile workers have long been trendsetters in the Canadian labour market, winning job security provisions, fringe benefits and pay rates that were copied bit by bit in other branches of industry. Now that the autoworkers have given up on resisting the switch to defined contribution plans, the writing may be on the wall for defined benefit plans in the rest of Canadian industry.
Ottawa and the provinces have agreed to expand the Canada Pension Plan. Starting in 2019, employee and employer contributions will be increased in small annual steps over seven years so that the contribution of an employee earning $54,900 would rise by $75 each year and by $515 over the whole seven-year phase-in period. Benefits will also be raised so CPP will pay about one-third of a person’s salary instead of the present one-quarter.
The shift to defined contribution plans, accelerated by the General Motors settlement, shifts to families the obligation to keep an eye on economic conditions and on their retirement income arrangements. Individual families have to make sure they have saved enough for their retirement and invested it wisely because their former employer will offer no help if the company pension turns out to be inadequate.
The enhanced Canada Pension will offer a part of the retirement income security private-sector employers will no longer provide. Employers such as General Motors will gradually reduce their pension costs — but at the same time their contributions to the Canada Pension Plan will increase. The net effect in industry may be to channel a larger share of retirement savings through the CPP and less through the private pension industry.
The net effect for government workers may be to pile enhanced CPP on top of cushy defined benefit pensions and create an economic elite of retirees enjoying the best of both pension worlds.